I formerly headed the federal agency responsible for overseeing hazmat transportation by air, land, sea, rail and pipelines at the Pipeline and Hazardous Materials Safety Administration (PHMSA) at the U.S. Department of Transportation. My experience also includes time as the federal government's top motor carrier attorney for the trucking, bus, and moving industries as the Chief Counsel of the Federal Motor Carrier Safety Administration (FMCSA), also at the USDOT. In 2013 I retired from the U.S. Navy after serving almost three decades on active and reserve duty as a Naval Aviator after tours of duty in Europe, Asia, Africa, and the Middle East.
I spend my time covering public policy impact issues for Forbes and other publications and provide legal and advisory services to public and private sector clients interested in matters pertaining to defense, energy, transportation, homeland security, and the environment.

Why Raising Taxes on the Oil & Gas Industry is a Bad Idea.

It is difficult to imagine a more controversial and politically exploited issue than taxes, especially with respect to the oil and natural-gas industry. During the Presidential Debate, Pres. Obama claimed that it would help the economy if the government were to end the energy industry’s “corporate welfare.” What analysts, experts and pundits alike fail to mention, or perhaps understand, is the fact that the energy industry does not receive any special tax treatments at all.

At issue is what is less commonly, but somewhat officially, referred to as the “standard tax provision.” Despite what politicians may say, section 199 of the U.S. Tax Code does not provide a subsidy at all. Rather, it provides a legitimate tax reduction available to nearly every American manufacturer. That’s right, there is no such thing as an oil and gas subsidy.

The standard tax provision was created by Congress as a crucial component of the American Jobs Creation Act. Section 199 of the Act encourages manufacturers to re-invest their capital in domestic operations in order to grow the economy and promote domestic job creation. In other words, Section 199 allows a domestic company to receive a deduction for building facilities within the U.S. designed to produce a product. For example, GM could use the “Domestic Production Activities Provision” to build and operate a new transmission plant here in the U.S. instead of say, Mexico or China. The provision applies evenly to software manufactures, traditional manufacturing activities and yes, even to the movie industry.

A rise in energy taxes – as the White House has proposed – would only place an even higher burden on American families, resulting in less money reinvested in developing American energy, higher prices, and less government revenue. For example, a recent study by Wood Mackenzie found that an increase in taxes on energy producers would also result in fewer jobs and less GDP growth.

Not only is the energy sector investing in America, but they also contribute more money in taxes than their actual profits to fill the American government’s empty coffers. According to Nick Schulz’s recent article in Forbes, ExxonMobil, for example, already pays three dollars in taxes for every one dollar of profit they receive in the United States. The current economic situation of the United States would be much worse, if not for needed government revenue from the energy industry. An outright repeal of this section would be devastating for U.S. companies seeking to stay afloat in a very competitive world market. A targeted repeal of this provision for the oil and gas industry would not actually raise revenue for the government coffers, it would only reduce them as the tax revenue generated through investing far outweighs any actual tax collected. Repeal of this provision would accomplish one thing, it would reduce investment and in turn, reduce the number of taxes paid for companies and the workers employed by them.

The truth is that the industry’s record of domestic investment extends to human capital. Today the oil and gas industry is responsible for more than 9.2 million jobs in the United States and contributes over 7.7 percent of the country’s GDP. A recent study by the US Chamber of Commerce suggests that shale oil and gas development alone has helped create 1.75 million US jobs in the last few years and that domestic energy could add another 2.5 million jobs by 2020 and 3.5 million by 2035. Another study by IHS-CERA shows that shale energy was responsible for $62 billion in federal, state and local tax revenue in 2012.

We would all do well to read Nick Schultz’s recent “Taxation Hero” article in Forbes. Many would be surprised to learn that ExxonMobil already pays three dollars in taxes for every one dollar in profit. Most are also surprised to learn that the U.S. already has the 4th highest corporate tax rate among industrialized nations.

“The report from the US Chamber also suggest that between now and 2035, shale energy could contribute more than $2.5 trillion in tax revenue, with more than half that amount going to state and local governments. Oil and gas producers are also expected to invest more than $5.1 trillion dollars during that same period according to the October 23 study.”

Instead of pointing fingers at companies largely responsible for pulling the nation through the last recession, the debate should focus on what would happen to our economy if we place an even higher burden on this industry and whether our economy is best served by a higher corporate tax rate than is found in France, Germany or the United Kingdom.

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wow how stupid you sound. sure reducing your income sounds bad, but how else would you get all these benificial necessities? What pays for transportation, public education and a list thousands more that everybody needs, taxes were created for a reason buddy.

All taxes are bad? Do you have a better suggestion to pay for schools, roads, public safety, and other necessities? I agree that taxes are out of control and even excessive to some degree, but eliminating all taxes seems absolutely ridiculous!

One question: The article talks about tax provisions that pertain to all businesses. No discussion of tax provisions available only to the oil and gas industry. Are you saying that there are NO provisions in the tax code that pertain only to oil and gas? Isn’t there a depletion allowance in the neighborhood of 15-20%? I can see writing off exploration costs just as other companies can write off R&D costs.

Good point! Depletion allowances for major oil companies were eliminated in 1975. The purpose of the article was to focus on larger companies but you’re right, a depletion credit for smaller companies is still in existence. I believe the credit first came in around 1926 (or so).

The current allowance “is limited to domestic U.S. production by independent producers, on the first 1,000 barrels per day, per well, of production, and is limited to 65% of the producer’s net income.” Cite: Congressional Research Service.

If that credit were to eliminated, it would raise revenue by approximately $1.15B /yr but my premise of reduced investment still applies.

Excellent post! Here’s another interesting fact. A study by IHS has also determined that every state, regardless of its capacity for natural resource production, is benefiting from job growth and tax revenues generated by the oil and gas industry.

The oil and natural gas industry is also the highest-taxed industrial sector in the nation, and provides roughly $86 million a day of taxes and fees to our federal government.

Furthermore, between the years 2006-2011, the effective tax rate of the oil and gas industry averaged 44.3 percent.

Meanwhile, healthcare service providers paid a rate of 35.1 percent, pharmaceuticals paid a tax rate of 24.2 percent and the average tax rate of industrial conglomerates was 15.8 percent, according to Standard & Poor’s Research Insight.

Increasing the tax burdens of the industry, especially during a period of high unemployment, will likely thwart the job creation abilities of independent oil and natural gas producers.

The manufacturing sector uses one-third of the nation’s energy and is the largest energy consumer in the U.S.

Because of this, higher energy taxes will likely cause the production of goods Americans use every day to become more expensive as manufacturers are forced to offset their additional overhead costs.

This will increase the cost of living for consumers and lower the amount of discretionary income consumers will have to redistribute back into the economy.

I could not agree more with this article! I believe the White House is spouting the politically correct and well-received message that we should be taxing the “rich” at a greater percentage than the middle class. This rhetoric reaches beyond individual taxation to corporations and industries perceived as “rich.” I will not get into an explanation of the basic math of percentages, which naturally ensures that the more money one makes, the more taxes are paid proportionally, or the fact that the lowest income brackets pay NO taxes. However, I do think this article shines a bright light on why we cannot afford to lose successful businesses (and their proportionally large tax contribution) under any circumstances, especially during the current recession. I just do not follow the logic of raising taxes on any business to such a degree that they would seriously consider doing business outside the US, taking their tax contribution with them. Even if you see the oil and gas industry as vile and evil, we desperately need their taxes! An increase to oil company’s taxes would be passed on to all of us at the pump, and none of us wants that. I think it is important to note here that Section 199 of the U.S. Tax Code does not provide a subsidy at all (not even to oil and gas companies.) We cannot proclaim loud enough that this provision provides a legitimate tax reduction available to nearly every American manufacturer, and THERE IS NO SUCH THING AS AN OIL AND GAS SUBSITY! That is such a common misconception. We need as many domestic companies as possible to (1.) Contribute to our tax base and (2.) Provide job opportunities. By crippling any industry with excessive taxes, we only serve to eliminate funds and jobs. The sad result would be the big oil companies such as Exxon, all the way to smaller oil companies, crumbling or relocating. Big oil giants like Exxon, whether we love them or despise them, are unavoidable. Smaller, often overlooked companies, such as Halek Energy Partners led by Jason Halek in Texas, would suffer the same fate if shackled with a special tax on the oil industry. This would be a shame because it is at that level that innovation occurs. I know that Halek’s company is utilizing cutting edge techniques to increase domestic oil production beyond what traditional means could accomplish. It is neither logical nor equitable to stifle success in any industry, even the much maligned oil and gas industry, with disproportionate taxes. Punishing the strong will not make the weak any stronger.